Here we go again. Asking the question: Should we raise tax rates or lower rates to close the deficit?
The President and many a Democrat think raising tax rates is the way to go. They stand behind their belief that government funding can drive the economy and cite John Maynard Keynes as their patron saint. They want to raise taxes to pay for economic “stimulation.”
But what if Keynes agreed with Republican on lower taxes?
President Obama has used Big Government to its fullest extent to turn the economy around. Economic and job recovery was promised if we passed the “Stimulus” bill, Obamacare and support such policies as funding Solyndra. Despite a lack luster economy and record long 8+% unemployment, the President and his supporters continue to tout a government led economy in their modern version of Keynsian economics.
But is that really what Keynes believed? In a word: No.
It is true that Keynes believed that government intervention in the economy could be beneficial. Government spending was part of several tools he thought the government could use to ensure economic growth and stability. In that sense, Keynes believed that government could prime the economic pump. The President and leading Democrats, however, believe that government should be the economic pump.
Keynes would not have agreed with that. To the contrary, as an economist, Keynes well understood that the main driver of the economy was the private sector and that government policy must ensure incentives so that the private sector can flourish.
Indeed, left out of the discussion of Keynsian economics, in the modern media today, is Keynes advocacy of tax cuts. It was Keynes, long before Reagan, that stated: “high tax rates defeat their own object,” i.e. to collect tax revenue. It was Keynes, long before Art Laffer, that said: “given sufficient time to gather the fruits, a reduction of taxation will run a better chance, than an increase, of balancing the budget.”
Keynes so believed that that he also said that: “For to take the opposite view today is to resemble a manufacturer who, running at a loss, decides to raise his price, and when his declining sales increase the loss, wrapping himself in the rectitude of plain arithmetic, decides that prudence requires him to raise the price still more-and who, when at last his account is balanced with nought on both sides, is still found righteously declaring that it would have been the act of a gambler to reduce the price when you were already making a loss.”
Keynes well understood that high tax rates destroy capital formation and limit profit seeking just as higher prices kill off sales. Lower rates, on the other hand, restore incentives and spur individuals to take risks, achieve and to expand the economy. Such basic human nature thinking, after three recessions under President Eisenhower and his top tax rate of 91%, convinced none other than JFK to say: “It is a paradoxical truth that tax rates are too high today and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut tax rates now.”
Although the top rate today is much lower, the combined state, local and federal rates – combined with the crushing regulatory burden (which has nearly the same effect as high taxes), all unheard of in their time, leaves us in much the same place as then. Government is now in the way of the private economy.
Throughout our history, the American economy has been like a sturdy pack mule. Periodically, we burden it with too many packs, in the form of taxes and regulations, weigh it down and slow its pace. Sometimes it even falls backwards down the hill. Now and then, smart leaders come along and lift off some of those packs, lessen regulatory burdens and reduce the weight of taxes, and our economy starts up again. It is not a recommendation unique to us. We read of tax battles and even reform in every age, like Urukagina’s tax reductions in Babylonia/Sumer in 2350 BC – so old is this problem and so old is the common sense remedy.
Rather than compound the problems of last decade, Democrats should stop misusing Keynes for what he never believed and starting quoting him for what he and JFK did believe. It is time to get government out of our way, through lower taxes and regulations, in order to turn our Country around. While we may disagree on spending priorities, if Keynes, Kennedy and Reagan can agree on how to collect revenues, we should too.